I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

Blame Congress, Not Facebook IPO, For Americans Souring On Stocks

Could mistrust of Congress and other institutions be keeping individual investors away from the stock market? (Photo credit: Wikipedia)

After Facebook’s messy initial public offering last month, the pundits (among them, billionaire Marc Cuban in his blog here) predicted it would turn individual investors off of the stock market. Sorry, but that’s a lot like saying that a looming Washington D.C. standoff over taxes and the deficit will lower Americans’ opinion of Congress, which has a current Gallup poll approval rating of just 13%.

The new triennial Federal Reserve Survey of Consumer Finances released earlier this month reports that only 15% of families were invested in stocks directly in 2010, down from 21% in 2001. And just 10% of families headed by someone younger than 35 owned stock directly in 2010, half the 20% who owned shares in 2001. Moreover, despite the spread of 401(k)s and the growing use of target date mutual funds (which include stocks) as the “default” option for workers’ retirement money, the percentage of families owning stock even indirectly fell from 53.2% in 2007 to 49.9% in 2010, the lowest level since the 1990s. Among families younger than 35, just 39.8% owned equities even indirectly in 2010, down from 49.1% in 2001, even though 42.1% of all young families owned retirement accounts in 2010.

Turns out, it might be more than a coincidence that Americans’ trust in institutions (not just Congress, but banks, big business and, yes, the media) has generally been falling along with their direct stock ownership. “When we look across countries, there’s definitely a connection between trust in society and the willingness people have to invest in the stock market,’’ says Paola Sapienza, the Merrill Lynch Capital Markets Research Professor of Finance at the Kellogg School of Management at Northwestern University. To trade in stocks, she points out, you need to trust in other people (company executives and perhaps a broker) and also trust that regulators will protect you from being cheated.

The most persuasive evidence that trust plays a role, Sapienza says, is the difference from country to country in direct stock ownership by the wealthy, who presumably should all own shares. A December 2008 paper she co-authored, Trusting The Stock Market, compared the rate of direct stock ownership among the richest 5% of residents in 12 developed countries. In Sweden, where trust was highest, 80% of the wealthiest owned stocks. In the U.S., where trust was a bit above average, 70% did. But in Greece and Spain, where trust was low, just 24% and 14%, respectively, of the wealthy owned shares directly.

Sapienza and Luigi Zingales, the Robert R. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, have been surveying Americans since December 2008 for something they call the “Financial Trust Index”. The results aren’t pretty. As of March, just 15% trusted the stock market, 14% trusted large corporations and 28% trusted mutual funds.

Obviously, trust sinks during a crisis. Still, levels of trust tend to be established fairly early in life, Sapienza says. “If you look at immigrants, if they came to the U.S. after high school, they behave in terms of trust in institutions, much closer to the people back home,’’ she observes.

That got me wondering how the 2008 financial crisis and current comparatively low levels of trust in the U.S. might affect those coming of investing age recently—the so-called millennials. My interest in the issue was peaked when I heard two 20-somethings say—after the Facebook IPO mess–that they wanted to invest in individual stocks.

Forbes contributor Chereen Zaki told me she’d recently opened an E*Trade account with her new husband. “The Facebook fiasco is what caught my attention. I think it was because Facebook was something I actually understood and could follow closely,’’ she explained in an email. Zaki, who earned a Georgetown University MA in Communication, Culture, and Technology in 2011, put it this way: “I figured that as a social media geek and someone who constantly trolls the news and stays up to date, I could use that to my advantage for other stocks. In a weird sense, I disassociated stocks from the greedy Wall Street suits and linked it to things I understand.’’ Zaki’s husband, who studied film in London, is “using his film knowledge to predict which blockbusters will affect studio stocks, and I’m doing the same with social media,’’ she continued. “So naturally we started small and invested in Time Warner, Walt Disney Co., and Zynga (at $5).’’

Similarly, my own 23-year-old son, who studied the environment and economics in college, wants to start investing in a few green tech companies. His reasoning; He can’t earn anything on savings in the bank, he wants to be only in socially responsible companies and the market as a whole has been a downer as long as he’s been watching it. (When he graduated from high school in 2007, the S&P 500 was above 1500; on Friday, it closed at 1335.)

Yet such comments fly in the face of both the Fed numbers, and what I hear from Nancy Anderson, a Certified Financial Planner and head of the “Think Tank” at Financial Finesse, a firm that has been hired by hundreds of employers to answer financial questions from workers. The under 30s who call for advice, she reports, are “asking questions on investing in the real estate market–buying a home because it is affordable and a good deal right now,’’ and some are investing in target date mutual funds. But they aren’t showing much interest in individual stocks and have less confidence in their investments (according to Financial Finesse’s surveys) than any other age group. “This age group not only saw their first 401(k) statements with a loss but they also observed what happened to their parents such as delaying retirement,”’ she notes, an experience that “may have added to their skepticism and mistrust that stock (and mutual funds) are the way to go.”

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Maybe younger folks are figuring out that as soon as you buy a stock these days it tanks. Perhaps they too are seeing that it is mostly insiders making any real money on stocks or at least that is how it can seem. Some of them probably look at stocks not as something to buy but as something they will sell when their start up hits it big. As far a not being able to get any interest on money from banks I suggest looking in to CDs offered by community banks popping up all over. I’ve seen a few offering 3.5% on a 6 month term. That may not be high but it beats a loss and it seems like a good place to park money while there are no other attractive investments to make.

Excuse me. This is headline is such utter tripe I almost had to disgorge my subway sandwich but seeing as how that would affect today’s work and wipe out my editing keyboard I refrained. Contrary to the supposition unsupported in the rest of your article the Facebook IPO says a lot about why the American people do not trust Wall St and cements many of the negative feelings that go back to the precious metals manipulations of the 70′s and the S&L crisis of the 80′s and subsequent booms and busts created by a market freed up from much regulation. Now I know that you as an individual contributor do not have much say in the headline writing but REALLLLLY?!?!?!?!

Your headline means essentially this. No one thinks their money is safe in a bank because Congress has not passed laws to stop Bonnie and Clyde from robbing them when we know Bonnie and Clyde work for the banks.

I will tell you as an individual and mutual fund stock investor that there’s a lot that should keep people away from individual stocks. Yes the $125 dollars I invested decades ago when I was 20 is now $1800 dollars towards my kid’s college education. Yes I bought Ford at $1.79 a few years ago and all but I also bought Christopher Banks at the wrong time. I don’t blame anyone, it’s what the market is. But get this: the thrust of Forbes editorial philosophy is regulation bad and Congress is to blame. Yet they have no problem blaming government when things don’t work. Having it both ways is typical of ideologues but not reality based. The past 30 years have shown to the public at large that Wall St. cannot be trusted. Period. End of story. There’s a litany of examples that cost the taxpayer hundreds of billions in asset value as well as crippling government services with additional costs. Enron and the manipulation of the energy market a small example compared to the investment banking and mortgage crimes that have gone mostly unpunished. Therein lies the rub. Wall St. truly has no accountability. We don’t see the Hamptons depopulated by crooks being put into Attica. What we see is more of the same. That ranges from the Facebook IPO to the Federal Reserve now backstopping $75 Trillion of Bank Of America’s derivatives trades, essentially putting us all on the hook for a LOT of money. Add to that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives, and as with B of A guaranteed by the FDIC and the Federal Reserve. That should scare any sane person but it seems insanity rules.

How blatantly criminal can you get? and the headline blames Congress for the lack of trust?

I think you missed the point entirely—Americans soured on stocks long before the Facebook IPO. Buying stocks requires one to trust in both CEOS and REGULATORS. That is hardly an argument for no regulation. To the contrary.

A more careful reading would show that such was my point too, that America has enough examples of Wall St. calumny over the past 30 years to put anyone off of stock trading. The problem is pretty much fully explained by those CEO’s and their allies who actively worked over the past 50 years to dismantle the very regulations that promoted trust in the market. The CEO’s got what they wanted, looser regulations and a greater free hand. For many this has meant higher profits and in many cases, insulation from the costs of their actions. The average person, including investors have not been not so insulated from the consequences. Wall St. itself holds most of the blame. Congress is not equal in this at all. The billions of dollars Wall St. pumped into lobbying Congress – so much money that even the most virtuous are compromised – for deregulation have had their result. More boom and bust cycles that seem to get deeper and deeper each time. I am scared ****less of what the next one will bring. Lower taxes, no job growth. Less regulation, less asset value for the average American. In fact the past 40 years we have seen little true wage growth. The past 11 years have been a painful lesson for the middle class and right now there’s not much hope for a less painful one if Wall St. continues to get its way. Giving Congress equal blame when in fact they are little more than paid mercenaries for Wall St.? Really?

Given what you believe, you should blame Congress as much as Wall Street. The CEOs and Wall Street execs are acting in what they perceive to be their own self-interest (even if their view is ultimately short-sighted, since what’s happened in recent years has undermined trust.) It’s Congress responsibility to represent the people— and not to be bought. Again, the trust in regulators —and regulators deserving of that trust–are a part of what encourages participation in the stock market. That’s a point that is either too little understood, or simply ignored, on Wall Street.

You give Wall St. quite the pass. I think they truly understand what is going on, have already figured it into their calculations and are moving along. It is true Congress has the responsibility to represent main st. I don’t think that has happened in decades. The telling vote in the past 20 years I think is the Senate vote that approved of repealing Glass-Steagel when only 8 relatively sane people voted against the repeal, Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, the late Paul Wellstone, Byron Dorgan, and Russ Feingold.

When you drop half a billion dollars into Congress every year and then up that over the past 4 years and then with the Citizens United decision on top of that with literally billions being spent in one election cycle, there is such an imbalance in power as to render any thought of Congress doing any meaningful regulation of Wall St. in the next few years to be a concept more laughable than the Mr. Peanut episode of the Mary Tyler Moore Show. The average person is now about as powerful as a broken toothpick and that is what Wall St. has wanted all along since Franklin Roosevelt first reined them in after the Great Depression.

People have been losing their faith in stocks, especially because of the United States’ economic crisis. Families have lost their whole savings because of a bad stock; recently, the market has been too precarious for many Americans to feel safe and to feel trust in the system.

Facebook’s poor IPO didn’t cause Americans to sour on stocks, but it played a role in adding to the lack of trust. After seeing a big company that many assumed would have nothing but high stock prices and great earnings ahead, people got a newsflash after the shaky IPO, though the prices are climbing up again.

The biggest problem with the market is misinformation, insider trading which attempts to hurt small investors, and the fact that our education system, even in business school, doesn’t really teach would be investors how to properly invest.

The old mantra of “buy low and sell high” is a lie and a truth all at once. Most people don’t/didn’t know (me included) that a high or low stock price isn’t based on the dollar price of a stock or whether or not you can afford it. Take for instance Berkshire Hathway A Shares that are currently selling at $122K with a high of about $147K back in 2009. At the current price of $122K, BRK.A could actually be a low buying point whereas $147K could have been a high selling point or even an over inflated price. Whether or not I can afford it has no relevance to the “buy low and sell high” mantra that is almost like cannon law in stock trading.

No Facebook is not to blame for people’s fear of the stock market. But stories like it, Enron, and all the other Ponzi schemes, coupled with a government that overspends makes people fearful of investing in stocks, especially when their education and the information provided is poor or non-existent in many respect. Add the fact that many (some, definitely not all) financial advisors and brokers couldn’t pick a good stock if it slapped them in the face. Oh and if these so called professionals actually told people they can’t predict the market, folks might make better decisions with their money.

Bottom line is, the government is only going to provide you up to $250K of savings account insurance, so you’re either going to have a bunch of accounts with $250K split up, or a whole lot of names on a huge account, and of course interests rates at the banks aren’t in the best interest of the consumers. They’re in the interest of the big banks, since the big bank executives and owners are the ones who sit on the board of the Federal Reserve Bank. Pushing papers, making sure that they’re able to continue their monopoly over the countries money and maintain the wealth gap.

There needs to be a total restructuring of our financial systems in many regards and a complete restructuring on how we educate our citizens on financial markets.